Richard Shane: Thanks, everybody, for taking my questions. Look, I think we reflect on the last six or seven years in terms of capital returns, both to equity holders and bondholders, I think you guys have done a good job. In terms of maintaining operating efficiency in the context of the shrinking business. I think you guys have done a reasonably good job. The challenge has been growing revenues. What I heard today is a strategy that seeks to maximize shareholder value by optimizing the cash flows and staying very disciplined about returning those cash flows to investors, to stakeholders. Again, very consistent with what we’ve seen over the last five or six years. At the end of the day, you guys are just still kind of squeezing the same fruit tighter and tighter.
Where is the growth going to come from? We hear about Earnest. We hear about the in-school initiatives. But again, that seems to be a pretty big opportunity given you’ve seen two of the largest players exit in the last three years. The market share objectives to 10% growth are pretty modest. Why not be more aggressive there? Or where are the other opportunities to actually start driving top line again?
David Yowan: Thanks, Rick, for the question. I think I could back to — while we have done — I think the team has done a good job of managing the expenses over time in a shrinking portfolio environment. What we’re trying to communicate today is that there’s a lot more work that these three actions are designed to address. And it’s not just about expense reduction, but as Ed indicated, that overhead, if you will, in a broad sense, the shared service functions, the corporate overhead and our cost of equity all conspire to make growth initiatives more challenged than they need to be, right? Because the portfolio is shrinking. If we don’t get rid of those central costs, then they get allocated growth initiatives that burdens them in a way that doesn’t allow them to reach their full potential or give us the capacity to make them.
So the first thing we’re going to — what we’re trying to accomplish is actually to unburden the growth initiatives but also at the same time and in the same way, increases our capacity to invest by increasing the amount of legacy loan cash flows that we have a decision to make a capital allocation decision to make about return and otherwise. With respect to the Earnest growth proposition, I think, we tried to lay out what Earnest has accomplished over the last three or four years. I think that’s impressive from a financial perspective. The brand health is a good indication that Earnest has found a way to surprise and delight the customers that it engages with and a customer experience. I know that Ed indicated this, my experience in financial services, that’s a really hard thing to do, and they’ve accomplished that.
That’s a really good foundation for us to think about how we can take those relationships and that positive brand attribute that Earnest has, which does not exist in the Navient brand and see what opportunities we have to grow off of that. And that’s more to come on that. We’re not ready to share that with you today. But that’s the foundation that we see for growth in Earnest.
Richard Shane: Got it. Look, the track record at Earnest has been very good. And obviously, the movement in rates has been a headwind, but that’s I mean that’s beyond your control. I think in hindsight, that’s proven to be a very thoughtful investment and ultimately will create value. What I’m hearing is there’s a chicken and egg problem, which is that the cost of capital makes it in the high hurdle rate makes investing in growth on attractive, but because there’s no growth, I think the cost of capital is elevated. You guys, in your slides link the multiple compression to the decline of efficiency. And I think that, that’s a very fair conclusion, but I would suggest also that the decline in multiple is really a reflection of top line shrinking almost every year for the past decade.
And I do wonder if there is some opportunity to break that paradigm that it might be painful in the short-term to invest. And by the way, I think if we think about the history of Earnest in that acquisition, there was disappointment at the time in that investment, but it has manifested into something that’s valuable. Is it time to break the paradigm again?
David Yowan: Yes. I think you summarized maybe in a little different way what we’ve been trying to communicate in the strategy update. It is a — I won’t call it a vicious circle, but it is a cycle that we’re in that has driven our cost of equity. And so we’re addressing the things that we can address, which is give ourselves some financial capacity and flexibility, give investors more transparency on the growth initiatives. I think this is the first time we’ve broken out Earnest Financials. It’s been within the Consumer Lending segment, which added both private legacy runoff and Earnest growth within it. So we’re trying to provide the transparency of the market. So you can more clearly see the growth and get a sense of the growth potential and the opportunities within Earnest.
Richard Shane: Very fair. And by the way, I should say I very much appreciate the transparency with — that you guys provided today in terms of the strategy, it’s very helpful and one of the more honest things we’ve seen in terms of company sharing their outlooks ever. So thank you very much.
David Yowan: Thank you
Operator: Thank you. One moment for our next question, please. Our next question comes from the line of Jeff Adelson with Morgan Stanley. Your line is now open.
